After a strong rebound in European equity markets, investors may need to become increasingly selective as valuations move closer to fair value, says Morningstar in their latest market report.
Morningstar’s Q3 2026 Europe Equity Market Outlook examines how European equities have recovered much of the ground lost during the Iran conflict, leaving markets trading at around a 4% discount to our fair value estimate. While broad market upside has narrowed, Morningstar continues to see attractive opportunities in areas that have lagged the recent rally.
Key takeaways from the report include:
- European equities now trade at around a 4% discount to our fair value estimate as markets recover from the Middle East conflict.
- Semiconductor valuations look stretched, while software stands to benefit as businesses move from AI pilots to implementation.
- AI investment is creating winners beyond technology, particularly in electrical equipment and grid infrastructure.
- Oil should revert to its long-term $65/bbl midcycle assumption as supply concerns ease.
- On valuations, we believe:
- Mid-cap stocks now offer some of the greatest upside in Europe, having largely missed the recent rally.
- Consumer Cyclicals remains the cheapest sector in Europe, offering around 20% upside to our fair value estimate.
- France and Germany are now Europe’s cheapest major equity markets.
Michael Field, Chief Equity Strategist at Morningstar, explains: “Markets have recovered much of the ground lost earlier this year as geopolitical uncertainty has eased, but investors should be careful not to assume the broad market rally has much further to run.
“The opportunities today are harder to come by than they were just a few months ago. We continue to find attractive value in areas that have lagged the recent rally, particularly mid-caps, consumer companies and software, while AI investment is increasingly creating opportunities well beyond the technology sector.”
To read the full Morningstar report, readers can use this link.
